1. US trade deficits increase
2. US interest rates fall relative to others
3. US inflation higher than others
Of these three, the last - inflation - is dominant, and the current Fed monetary policy ensures rising inflation in the months and years to come, causing the dollar to fall in value relative to countries with better inflation management.
The explosion of the monetary base, as the chart below shows is sure to cause inflation unless that money can be removed from the system quickly.
The dilemma facing the Fed is the effect of removing this new money on interest rates and economic activity. In order to take money out of the system, the Fed has to sell something, and that something is the securities they hold.
In particular, the Fed has to sell $1 trillion in securities, and that will raise interest rates as sure as the sun comes up.
Put this in perspective.
If the Fed sells $40 billion in securities each month, it will take two years to get all that money out of the system.
If the monetary authorities begin this program quickly, economic activity is certain to fall, and that is not in the Fed's plans.
So, until the Treasury stops selling bonds to fund the explosion in Federal expenditures, and the Fed can begin selling to reduce the monetary base, inflation is building and the dollar is doomed.
Here is the relevant currency chart.
The number of dollars it takes to buy the Euro.
Notice that the general trend is up, meaning the Euro central bank is better at controlling inflation than the US Federal Reserve.
Next, notice that the recent collapse in the US economy has reversed that trend.
Finally, notice that the trend is about to resume.
Unless the Federal Reserve can find a way to pull all that new money out of the system without crashing the US economy, the dollar is in for a long fall.
When combined with the flood of US securities coming, this is disaster for financial institutions unable to extend the maturity of their liabilities.
TACTICS
Extend the maturity of your liabilities. Get as far out the curve as senior management and the board will allow you. Make sure of credit quality as you add assets.
Money market arbitrage will power the institution for the years to come, as the spread between bank paper and everything else widens.
STRAGEGY
It's time to get back to work. We've survived the biggest scare since the Great Contraction of 29-33 and we now have profit opportunities not seen in decades.
Warn senior management and the Board that disaster is coming: inflation and rising long rates are certain.
